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Along with the early signs of springtime, and the hopefulness that the cold days of winter are long gone, also comes the realization that the ever-so-ominous tax season is here. To help alleviate some of the pressure and perplexity that comes with preparing your taxes, I turned to Thomas J. Duffy, a certified public accountant (CPA) with Kutchins, Robbins and Diamond, Ltd. of Schaumburg, IL. He let me in on the steps to take, and not take, when it comes to filing your taxes and what it is you can start doing now to get ready for the 2013 tax season.
Debra Gorgos: Tax season is here, what is your number one piece of advice for a carwash/detail shop owner in terms of not panicking?
Thomas J. Duffy: Reflect on the past year with particular attention to anything unusual such as: Storm damage, theft, large purchases or replacement of equipment and new hires. There were some very generous tax provisions for 2011 that you will not want to miss.
Some of these provisions include 100 percent bonus depreciation for assets purchased in 2011 and a federal tax credit for the hiring and retention of new employees.
Debra Gorgos: What are the first five steps to take to get ready to file the tax forms?
Thomas J. Duffy:
- Reconcile the bank activity for the entire year to make sure that you have properly captured all income and expenditures. It is interesting to note that the first thing an IRS agent will do upon an audit of your carwash is to request the bank statements. They will want to make sure that you have properly accounted for all deposits of cash.
- Focus on the categorization of the deposits that were made into the company bank account. Make sure you don't include in revenue any loans you made to the company or received from outside sources. Deposits that cannot be explained will be classified as revenue upon an IRS audit.
- Examine your expenditures and make sure that any expenses that are personal in nature and not deductible are noted.
- Review your prior year fixed assets schedule and determine if any assets were taken out of service in 2011 or disposed of in 2011. You may have the potential for a favorable tax write-off.
- Start planning for 2012. Consider setting up a medical reimbursement plan, a tuition reimbursement plan or a retirement plan. Congress is allowing carwash owners to deduct 50 percent of asset additions immediately under the 50 percent bonus depreciation rules for 2012. This is very beneficial from a tax minimization standpoint and is scheduled to expire at the end of 2012.
Debra Gorgos: Do you have advice for those people out there who are new business owners?
Thomas J. Duffy: If possible, don't personally guarantee any loans or leases of the carwash operation. In this rough economy it is painful enough to have to fold, but what is even more painful is having to shut down a business and being saddled with debt from a personal guarantee.
As far as entity formation goes, try to use an entity that protects you from liability. The days of reporting income on a Schedule C are long over. With the abundance of predatory lawsuits you must make sure that you are structured correctly.
Make sure your business is adequately capitalized. The majority of cash flow projections for new operators under-estimate expenses and over-estimate revenue. Make sure you have enough capital set aside in the event your carwash will be shut down for a few weeks due to unforeseen events (storms, vandalism, etc.).
Don't forget about your family. Make sure your family knows that your first few years of running a carwash will require a considerable amount of time. You will be required to work irregular hours and this has the potential to have a negative impact on your family. Communication with family members is key.
Debra Gorgos: A lot of people are intimidated about filing and preparing tax forms, what advice do you have for them?
Thomas J. Duffy: Focus on your carwash. Retain the services of a qualified CPA. Your time is too valuable and is best utilized on doing what you know best.
Debra Gorgos: What advice do you have for owners to follow over the next year to make 2013 as easy as possible in terms of tax season?
Thomas J. Duffy: It is never too early to start thinking about estate planning. Now is a great time to begin gifting either stock or membership interests to children. With the estate and gift phase-out amounts changing every two years, you have a very unique opportunity with the current estate and gifts amounts currently at $10 million for married filers and $5 million for single filers. This basically means that a married couple can gift up to $10,000,000 to children, or anyone else for that matter, absolutely free of tax. This is an amazing opportunity.
Also, make sure you are properly structured from a tax and legal standpoint. If you own a carwash and the real estate the carwash is located on you should have two separate entities in place. The carwash should be held inside of an S. corporation and the real estate should be held separately inside of an LLC. This gives an operator both tax and legal protection. Tax protection because S. Corporation shareholders will be able to minimize the self-employment tax on distributions from income that they distribute from the S. corporation (this option is not available for LLC members). The LLC structure is a tremendous asset protection tool. The LLC also works well in terms of structuring a family limited partnership, which every business owner with kids should definitely be thinking about.
Review your overall financial position and your financial goals. Are you maximizing your retirement contributions? Do you have a retirement plan in place? Those operators that are 50 years of age or older should consider the benefits of starting a defined benefit plan. This type of plan has the potential to allow you to defer hundreds of thousands of dollars into a retirement plan each year. Planning for the future is key to any successful business.